Nestle India highlights significant gains from parent’s IPRs amid royalty payout dispute

Packaged foods company Nestle India has said it has benefitted "immensely" from its parent company's intellectual property rights, or IPRs, over the years, leading to greater speed of innovation as well as cost-savings to the business. The statement comes in the wake of a majority of shareholders rejecting a proposal to increase the royalty payout to its Swiss parent, Société des Produits Nestlé S.A., from 4.5% to 5.25% per annum. 

This is the first time the company has detailed these benefits since the proposed hike was turned down.

Nestle India maintains a licensing agreement with its parent company that grants it exclusive rights to manufacture and sell Nestle products in India, use Nestle trademarks, and access Nestle's technology, know-how, and patents. This access is crucial for the company's business operations. 

In its annual report for FY24, Nestle India credited these IPRs with enhancing innovation speed, achieving cost savings, and enabling the premiumization of its product categories.

The annual report was published on Saturday, two days after Nestle India board said it would continue paying royalty at the existing rate.

Read This | Mint Explainer: Why Nestle failed to raise royalty payments while rivals did

The company elaborated on the benefits, citing improvements in product innovation and renovation (I&R), speed to market initiatives, factory design, production automation, productivity in commercial execution, distribution expansion, digital consumer engagement, and strategic revenue management for sustainable pricing. These initiatives have reportedly led to enhanced efficiency and reduced waste, contributing to the company's operational success.

Cost savings and financial performance

Furthermore, Nestle India highlighted cost-saving measures that have resulted in annual savings of about 1.5% of sales, driven by recipe optimization, energy savings, productivity improvements, and better procurement efficiencies.

Despite these reported benefits, the proposed increase in royalty payments was met with strong opposition from shareholders, with over half (57.17%) voting against the decision. Major investors and proxy advisory firms argued that the company's financial performance did not justify the increased payments. As a result, Nestle India's board decided to maintain the royalty payment at the existing rate of 4.5%, with a review scheduled every five years.

Also This: Why royalty payout as a percentage of revenue needs to be relooked

The company also noted significant brand strength growth in its licensed products, such as Maggi and Nescafe, and an increase in sales from new innovations and premium products, contributing positively to its profitability.

Additionally, the share of sales from new innovations rose from 3% in 2018 to over 6% in 2023, driven by products such as Lactogrow, Nescafe Black Roast, biryani mixes, and Munch cereals. The contribution of premium products to overall sales also increased, growing from 10.4% in 2018 to 12.1% in 2023.

These premium offerings significantly boosted the company's profitability, demonstrating the value derived from the intellectual property rights received from its parent.

Furthermore, Société des Produits Nestlé S.A. has been instrumental in driving digital transformation across various functions within Nestle India. This digital push has resulted in IT cost savings of about 1% of sales compared to its peers, showcasing the efficiency gains achieved through technological advancements.

The parent company has also been instrumental in driving digital transformation across functions, resulting in IT cost savings of about 1% of sales.

To be sure, Nestle S.A. and Maggi Enterprises hold 34.28% and 28.48% of Nestle India, respectively, giving the promoters a combined stake of 62.76%. The remaining 16% is held by non-institutional and retail investors.

Nestle India recently switched its financial reporting period from a calendar year to a financial year, with the latest annual report covering 15 months. The company reported sales of ₹24,275.5 crore and a profit of ₹5,341.8 crore for this period. 

In August 2023, the board requested an independent assessment of the benefits provided under the General License Agreements (GLAs) from McKinsey & Company, which confirmed significant support from the parent company in areas like innovation, cost savings, premiumization, and digital data.

Also Read | Blowing Hot: How climate crisis can rain on FMCG’s FY25 show